German Economic Model Vindicated by GDP Data

Germany’s reputation as the healthy man of Europe has been reinforced by better-than-expected growth in gross domestic product (GDP – click here for an explanation) for the second quarter, as growth contracted in the broader euro zone.

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Reichstag Parliment building, Berlin, Germany

On Tuesday morning, euro zone GDP data for the second quarter shrank by 0.2 percent, as predicted by analysts polled by Reuters.

Germany, Europe’s biggest economy grew by 0.3 percent between April and July – not a huge leap, but better than most of the euro zone – as its export strength continued.

“Germany’s point is if you run a low budget deficit you can still have economic growth. You can’t depend so much on government spending, fundamentally it has to be about the competitiveness of the economy, and Germany’s shown that.”

The Dax , the main German market index, rose following the news. There are already concerns that Germany’s third-quarter growth will slow, after poor early indications from manufacturing orders and industrial output.

“We should be very thankful that it’s growing as much as it has given that so much of their exports go to Europe,” Morris said. He added that he would still recommend investing in Germany, despite recent historic lows in German Bund yields.

France also announced slightly better-than-expected GDP numbers for the quarter, with growth stagnating rather than the expected 0.1 percent shrinkage. There are even greater concerns about France’s economy, which is heavily weighted towards the public sector.

“France has not even started to tighten fiscal policy. France is going into recession and it’s going to deepen next year,” Richard Cookson, global chief investment officer at Citi Private Bank, told CNBC.

Business investment grew by 0.7 percent, after slowing ahead of France’s elections earlier in the year, but household consumption, one of the main drivers of the French economy, contracted by 0.2 percent in the second quarter.

Will German Growth Delay Crisis Action?

Daniel Morris, global strategist at JPMorgan Asset Management, told CNBC that there is still a lot to be done around Europe and the calm in the markets may only be temporary as a result of people being on holiday.

“France is more dependent on these large international companies,” Morris warned. “There’s got to be more doubts about how things will progress in France, particularly when you look at the tax changes coming in.”

The Netherlands, which will hold elections next month, reported a surprise rise in GDP of 0.2 percent for the quarter. It had been expected to shrink by 0.3 percent.

While the euro zone’s two largest economies performed better than hoped in the second quarter, forecasters warn that they can only withstand the gloom elsewhere in the currency region for so long.

“We have parts of the euro zone in a deep, nasty recession,” Cookson said.

“We have capital flight from the periphery to the core and we have Greece leaving the euro zone at some point.”

Greece’s GDP shrank by more than 6 percent during the second quarter, as austerity measures imposed as part of its bailout by international lenders continued to bite.

With thin trading volumes, as often happens in August, the market seems to be looking forward to September, when Europe’s politicians return from holidays.

“None of the data really has an impact on markets. They’re looking at Greece and the German constitutional court ruling in September,” Marc Ostwald, strategist at Monument Securities, told CNBC.

“If we just kick the can down the road the way Mario Draghi (the President of the European Central Bank - click here for an explanation) is doing, all we are doing is creating a refinancing mountain for both Spain and Italy,” he warned.